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Scarcity

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Scarcity

Do you ever wish you could get whatever you wanted, whenever you wanted? In other words, you had unlimited money and everything you wanted was in limitless supply? Well, you're not alone. In fact, it's safe to say this is one of humanity's greatest challenges - how to make the best possible choices, with the limited resources we have. The concept of Scarcity is a foundational one in Economics and society in general because it forces Economists to answer the question: what choices are best for individuals and economies as a whole in light of scarcity? Want to learn how to think like an Economist? Then read on!

Scarcity Definition

To Economists, scarcity is the idea that resources (such as time, money, land, labor, capital, entrepreneurship, and natural resources) are only available in limited quantities, whereas wants are unlimited.

Alternately stated, Scarcity occurs because resources are not available in amounts that can satisfy all the ways society wants to use them.

Scarcity is the concept that resources are only available in limited supply, whereas society's demand for those resources is essentially unlimited.

Economists use the idea of scarcity of resources to emphasize the importance of properly valuing, choosing, and allocating those resources in the production of the goods and services that make an economy operate. Therefore, scarcity is an important fundamental economic problem because we have to think about the choices between, and allocation of these resources so that we make the best use of them.

In order to deal with the significant challenge of scarcity, we must first define some concepts so that we are all working from the same basis.

What exactly is a resource? Well, in order to answer this question, we must think of resources as anything that is required to produce something else.

If Maria wanted to open a lemonade stand on a hot summer day, she would need lemons, water, sugar, glasses, a spoon to stir, a table, a sign, and her time. This will require Maria to take time out of her day to go to the store and purchase the key ingredients, go back home and organize all of the factors required on the sidewalk, and make an attractive sign to entice people to buy her lemonade. Since none of the resources she needs exists in unlimited supply, it is their scarcity that makes them valuable.

Can you think of other ways Maria could have used her time and money instead of opening a lemonade stand? Economists define those foregone choices as Opportunity Costs.

Factors of Production and Scarcity

Economists call an economy's resources - Factors of Production, and classify them into four categories:

  • Land
  • Labor
  • Capital
  • Entrepreneurship

Land

Land is the factor of production that can be thought of as any resource that comes from the earth such as wood, water, minerals, oil, and of course land itself.

Labor

Labor is the factor of production that can be thought of like the people who do the work required to produce something. Therefore labor can include all kinds of jobs, from engineers, to construction workers, to lawyers, to metal workers, and so on.

Capital

Capital is the factor of production that is used to physically produce goods and services, but that first have to be manufactured itself. Therefore, Capital can include things like machinery, tools, buildings, and infrastructure.

Entrepreneurship

Entrepreneurship is the factor of production that is required to take the risks, invest the money and capital, and organize the resources required to produce goods and services. Entrepreneurs are a key factor of production because they are the people who develop the products and services (or identify new ways to produce them), then identify the correct allocation of the other three factors of production (Land, Labor, and Capital) so as to successfully produce those products and services.

The factors of production are scarce, therefore, properly valuing, choosing, and allocating these in the production of the goods and services is very important in Economics.

Scarcity and Opportunity Cost

Do you ever find yourself wondering "was the thing I just bought worth the price?" The truth is, there's a lot more to that question than you might think.

For example, if you bought a jacket that cost $100, an Economist would tell you it cost you a lot more than that. The true cost of your purchase includes anything and everything you had to give up, or not have, in order to get that jacket. You had to give up your time to earn the money in the first place, the time it took to go to the store and select that jacket, anything else you could have bought instead of that jacket, and the interest you would have earned if you had deposited that $100 into a savings account.

As you can see, Economists take a more holistic approach to the idea of cost. This more holistic view of costs is something Economists call Opportunity Cost.

Opportunity Cost is the value of everything a person has to forego in order to make a choice.

The Opportunity Cost of you taking the time to read this explanation on Scarcity is essentially anything and everything you could be doing instead. This is why Economists take choices so seriously - because there is always a cost, no matter what you choose.

In fact, you can rightly think of the Opportunity Cost of any choice you make as the value of the next best, or highest-value alternative you had to forego.

Causes of Scarcity

You might wonder, "why are economic resources scarce in the first place?" Some might say that resources such as time or natural resources are scarce simply by their very nature. It is also important, however, to think of scarcity in terms of what it means to choose to use a resource for one specific function versus another. This is known as the concept of opportunity cost. It is therefore not only the limited quantities of resources we have to consider but also the opportunity cost implicit in how we choose to use them, that contributes to scarcity.

If you were a lemonade stand owner and you went to a lemon orchard, you might think to yourself "I will never sell enough lemonade to need all these lemons...lemons aren't scarce at all!"

However, it is important to realize that every lemon you buy from the lemon orchard to make lemonade for your stand, is one less lemon another lemonade stand owner will be able to buy. Therefore, it is that very process of using a resource for one use versus another use that is at the heart of the concept of scarcity.

Let's peel the lemon back a little more. What ideas are implied in our example? Several actually. Let's consider them more closely, because they represent the causes of scarcity.

Unequal distribution of resources

One of the causes of scarcity is an unequal distribution of resources. Often, resources are available to a certain set of the population, but not to another set of the population. For example, what if you lived in a place where lemons were simply not available? In cases like this, the problem is that there is no effective way of getting resources to a certain group of people. This could occur because of war, political policies, or just a lack of infrastructure.

Rapid increases in demand

Another cause of scarcity occurs when demand increases more rapidly than supply can keep up with. For example, if you live somewhere with mild summer temperatures, when an unusually hot summer occurs, you can expect there to be a large spike in demand for air conditioning units. While this type of scarcity doesn't usually last for a long period of time, it does demonstrate how a rapid increase in demand can cause a relative scarcity to occur.

Rapid decreases in supply

Scarcity can also be caused by a rapid decrease in supply. Rapid supply decreases can be caused by natural disasters, such as droughts and fires, or political reasons, such as a government imposing sanctions on another country's products making them suddenly unavailable. In cases like this, the situation might only be temporary, but still create a scarcity of resources.

Perception of scarcity

In some cases, the causes of scarcity could simply be due to personal perspectives. In other words, there may not be any shortage of goods and services at all. Rather, the problem may be that someone simply thinks there is a shortage and tries to conserve more, or doesn't bother to look for the resource at all. In other cases, companies sometimes purposely create a perception of scarcity in order to entice consumers to purchase their products. In fact, this is a ploy commonly used in higher-end products and electronics.

Scarcity Causes of Scarcity StudySmarterFigure 1. Causes of scarcity, StudySmarter Originals

Examples of Scarcity

Let's talk about some real-world examples of scarcity at the personal level and the global level.

Examples of personal scarcity

On a personal level, if you are reading this, there is a good chance that you are taking an Economics class. Perhaps it is because you are extremely passionate about economics, or perhaps it's an elective course you decided to take because of passive interest. Regardless of the reason, you are likely experiencing a relative scarcity of time. You have to allocate enough time to your Economics course to review and try to best understand all the key concepts, which means you have to take time away from other activities such as reading, watching movies, socializing, or playing sports.

Whether you realize it or not, you're constantly grappling with the concept of scarcity in this manner, as it relates to time and other limited resources. Sleep can be an example of a scarce resource if it's the night before your Economics exam and you allocated too much time to socializing and not enough time to study.

Scarcity A Student Studying Under Time Scarcity StudySmarterA student studying, Wikimedia Commons

A Student Studying - StudySmarter. Source: Wikimedia Commons

Examples of global scarcity

At the global level, there are many examples of scarcity, but one of the most common is natural resources such as oil.

As you may know, oil is produced underneath the earth's surface, and the oil we extract today actually began forming millions of years ago. There is only so much oil the earth produces both because of the natural supply of its constituent ingredients (carbon and hydrogen) and because of how long it takes for the earth to form the final product.

Like time, there is simply only so much oil, and while countries that have direct access to oil-bearing land are continually working to improve the methods of oil extraction, it is precisely the scarcity of oil that makes it precious and valuable. On a global level, countries must decide between allocating resources such as labor and capital to oil extraction versus, for example, the research and development of renewable energy technologies. Many would say both are important, but at this time it is the oil industry that is getting the larger share of scarce resources.

Scarcity - Drilling for Scarce Oil - StudySmarterDrilling for scarce oil, Wikimedia Commons

Drilling for Scarce Oil - StudySmarter. Source Wikimedia Commons

Types of Scarcity

Economists classify Scarcity into three different categories:

  1. Demand driven scarcity
  2. Supply driven scarcity
  3. Structural scarcity

Let's take a closer look at each type of scarcity.

Demand-driven scarcity

Demand driven scarcity is likely the most intuitive type of scarcity simply because it is self-descriptive. When there is a great deal of demand for a resource or good, or alternatively when the demand for a resource or good is growing more quickly than the supply of that resource or good, you can think of that as demand-driven scarcity because of the imbalance between demand and supply.

Recent examples of demand-driven scarcity have been seen with some popular video game consoles. In these cases, there were simply not enough of these video game consoles available for purchase because the demand for them was so high that the supply simply couldn't keep up, leading to a shortage and therefore a demand-driven scarcity.

Supply-driven scarcity

Supply-driven driven scarcity is, in a sense, the opposite of demand-driven scarcity, simply because there is either not enough supply of a resource, or the supply for that resource is shrinking, in the face of constant or possibly even increasing demand.

Supply-driven driven scarcity occurs frequently with respect to the resource of time. There are only 24 hours in a day, and each hour that passes leaves less time in that day. No matter how much time you demand or desire, its supply will continually decrease until the day is done. This is particularly noticeable when you have an economics paper due the next day.

Structural scarcity

Structural scarcity is different from demand-driven scarcity and supply-driven scarcity because it generally only affects a subset of the population or a specific group of people. This can occur for geographical reasons or even political reasons.

A good example of structural scarcity due to geographical terms is the lack of water in very dry areas like deserts. There are many parts of the world where there simply is no local access to water, and it has to be shipped in and carefully conserved.

An example of structural scarcity due to political reasons occurs when one country places economic sanctions on another or creates trade barriers. Sometimes a country will disallow the import and sale of another country’s goods for political reasons, such that those goods become unavailable. In other cases, a country can impose heavy tariffs on another country's goods making them much more expensive than they would be in the absence of those tariffs. This essentially decreases demand for those (now) expensive goods.

Effect of Scarcity

Scarcity is a key foundational concept in economics because of the effect it has, and the type of thinking it requires. Scarcity, regardless of the type, forces people to make important choices about how to allocate and use resources. If resources were available in unlimited amounts, economic choices would not be necessary, because people, companies, and governments would have unlimited amounts of everything.

However, since we know that is not the case, we have to start to think very carefully about how to choose between and allocate resources so that their use yields the best possible results.

If, for example, you had unlimited money, you could purchase whatever you wanted, whenever you wanted it. On the other hand, if you only had $10 available to you today, you would have to make important economic choices as to how to best use that limited amount of money.

Similarly, for companies and governments, critical large-scale and small-scale choices need to be made in terms of how to target, extract/cultivate, and apply scarce resources such as land, labor, capital, and so on.

It is the concept of scarcity that underpins the importance of the social science that is Economics.

Scarcity - Key Takeaways

  • Scarcity describes the concept that resources are only available in limited supply, whereas society's demand for those resources is essentially unlimited.
  • Economists call an economy's resources - Factors of Production, and classify them into four categories: land, labor, capital, and entrepreneurship.
  • Opportunity Cost is the value of everything a person has to forego in order to make a choice.
  • Causes of Scarcity include: unequal distribution of resources, rapid demand increases, rapid supply decreases, and perceived Scarcity.
  • There are three types of Scarcity: demand-driven Scarcity, supply-drive Scarcity, and structural Scarcity

Frequently Asked Questions about Scarcity

A good example of scarcity is the natural resource of oil. Since oil can only be manufactured by the earth, and it takes millions of years to be produced, it is very limited by its intrinsic nature.

There are 3 types of scarcity:

  • Demand driven scarcity
  • Supply driven scarcity
  • Structural scarcity

Scarcity is a foundational economics principle that says that resources are limited requiring choices to be made about how to allocate these limited resources to their best possible use.

The causes of scarcity are rooted in the fact that resources are not limitless. When that fact is coupled with the demand associated for those resources, which results from unlimited wants, scarcity occurs.

The effects of scarcity in economics are foundational because they require explanations and theories of how to best choose and allocate limited resources in a way that yields the best results for people, societies, and economic systems.

Final Scarcity Quiz

Question

Economics is the study of ________ and choice.

Show answer

Answer

scarcity

Show question

Question

Which of the following is NOT a Factor of Production?

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Answer

Money

Show question

Question

__________ ____ is the value of everything a person has to forego in order to make a choice.

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Answer

Opportunity Cost

Show question

Question

Which of the below is one cause of Scarcity?

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Answer

Perception

Show question

Question

What are the three types of Scarcity?

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Answer

Demand-drive

Supply-driven

Structural

Show question

Question

Scarcity occurs because resources are not available in _________ amounts 

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Answer

unlimited

Show question

Question

A ________ is anything that is required to produce something else.


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Answer

resource

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Question

The ___________ ____ of any choice you make is the value of the next best alternative you had to forego. 

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Answer

opportunity cost

Show question

Question

Unequal Distribution of Resources is a cause of ________ where resources are available to one group of people, but not to another group of people

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Answer

scarcity

Show question

Question

Rapid Increases in ______ is a cause of scarcity that occurs when demand increases more rapidly than supply can accommodate.

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Answer

demand

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Question

__________ scarcity is different from demand driven scarcity and supply driven scarcity because it typically only affects a subset of the population or a specific group of people. 


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Answer

Structural

Show question

Question

Running out of time is an example of ______-driven Scarcity

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Answer

supply

Show question

Question

The absence or lack of water in very dry areas like deserts is an example of __________ Scarcity.


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Answer

structural

Show question

Question

Scarcity, regardless of the type, forces people to make important choices about how to allocate and use _________. 


Show answer

Answer

resources

Show question

Question

________ occurs because resources are not available in amounts that can satisfy all the ways society wants to use them. 


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Answer

Scarcity

Show question

Question

An old video game has become popular again through its feature in a new movie. Now people are flocking to stores to buy it. This is an example of...

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Answer

Demand-driven Scarcity.

Show question

Question

An oil-producing country has placed an embargo on a smaller nation it supplies with oil until the smaller nation's leader agrees to new terms of a treaty. This will cause ________ scarcity for oil.

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Answer

structural

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Question

Massive storms in the Atlantic Ocean have prevented containerships from entering ports all along the coast. None of them could unload their cargo onto the awaiting semi trucks. This would cause ________ scarcity.

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supply-driven

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Question

Which is not an example of a land resource?

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Answer

People

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Question

Entrepreneurship is a scarce resource because...

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it is a key factor of production because they are the people who develop the products and services.

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Question

A company wants to expand its warehouse. It also wants to expand its production plant to fill the new warehouse. It does not have enough investors to build both. They must make a choice between one or the other. The choice they did not make is the ________________.

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Answer

Opportunity cost

Show question

Question

What is an example of scarcity due to an unequal distribution of resources?


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Answer

One village is located right on the main shipping route and the second is located 30 miles into treacherous mountain terrain. Therefore the first village has more selection of goods.

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Question

People think that diamonds are rare even though that is not necessarily the case. This is an example of...


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perceived scarcity.

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A rapid increase in demand could look like...

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A hot summer causes people to buy more air conditioning units.

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Question

In which situation might entrepreneurship be scarce?

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Answer

Where there is little reward for innovation.

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When supply suddenly increases, demand is scarce.

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Answer

False, when demand suddenly increases, we see demand driven scarcity.

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Question

When you have to make the choice between studying for an exam or going out for a movie, you are experiencing, _____________. 

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Answer

Personal scarcity.

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Question

If the entire world is running low on oranges due to citrus greening, there is __________ scarcity.

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Answer

global

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Question

A farmer wants to plant both mandarin oranges and grapefruits in his orchard. Wherever he plants a grapefruit tree he cannot plant a mandarin orange tree. The _______________ of planting a grapefruit tree is _______________.

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Answer

opportunity cost, not planting mandarin orange trees. 

Show question

Question

Natural resources can never be scarce. 

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Answer

False.

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Question

Labor as a factor of production only refers to those in the production industry.

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Answer

False, it refers to the entire labor force including jobs like engineers, lawyers, and construction workers.

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Question

If you want to open a lemonade stand but can't find a good table to use as the stand, which factor of production is scarce?

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Answer

Capital, because you do not have a table on which to produce and sell the lemonade.

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Question

What is the opportunity cost of spending $50 on a pair of pants?

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Answer

The opportunity cost is anything that you now cannot spend that $50 on, such as food or a trip to the movies.

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Question

 Scarcity is an important fundamental economic problem because we have to 

choose between, and allocate resources so that we make the best use of them. 


Show answer

Answer

True.

Show question

Question

Resources are limited to physical tools that help us produce.

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Answer

False, resources can also be time, money, effort, education, etc.

Show question

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